DENVER – As Denver works to create a new organization to address housing and homelessness, Denver Auditor Timothy M. O’Brien, CPA, found weaknesses in how the city is making sure affordable homes stay in the affordable housing program inventory and making sure the program is not abused through illegal rentals and other violations.
“We found problems with how the city is keeping homes affordable, keeping people in those homes, and tracking affordable homes to ensure they are not misused,” Auditor O’Brien said. “The city needs to be better equipped to preserve its limited affordable housing inventory and to help people who need the housing get access and stay in those homes.”
The Auditor’s Office completed a previous audit of the affordable housing program in 2018. While auditors identified several areas of weakness and the mayor’s office responded by announcing a new department and plans to make improvements, auditors also identified other problems outside the scope of the audit, which needed further assessment in a new audit.
“Our last audit uncovered several areas of concern related to the affordable housing program, and I decided we had to address them in a second audit right away,” Auditor O’Brien said.
This new audit found Denver Economic Development & Opportunity, formerly the Office of Economic Development, is not evaluating the affordable housing program effectively. This means the agency is not reviewing outcomes from its work to confirm alignment with established goals.
The audit also found Economic Development is not adequately enforcing affordable housing violations, which could allow some homeowners to take advantage of the system while others who need affordable housing cannot buy the home they need.
Auditors identified one homeowner profiting by renting out an affordable home for nearly $3,000 a month, which is not in violation of short-term rental regulations but is in violation of affordable housing restrictions. In another case, auditors found one affordable housing homeowner attempted to circumvent covenant restrictions by creating a company to foreclose on their own home in Stapleton.
Economic Development began compliance efforts in 2018, although affordable home rules requiring confirmation of occupancy have been in place in Denver for the past 14 years. If a homeowner is found to be out of compliance with an affordable housing covenant, there are several remediation actions Economic Development can use. These include potential lawsuits to recover excess amounts gained from a market-value sale of an affordable home or to collect rent a homeowner charged while violating affordable housing covenants. However, the agency has not decided to use any of these actions against violators, as of May 2019.
Further, Economic Development does not check in annually with affordable housing owners to confirm it is still their primary residence and that they are in compliance with affordable housing covenants. Auditors found other comparable cities use annual letters requesting proof of occupancy to identify possible violators of covenants.
“Although Economic Development has new enforcement efforts, a lack of follow-through when getting violators into compliance could allow some people to continue to profit by taking advantage of the system,” Auditor O’Brien said.
Auditors also found several examples of how the city could more effectively manage affordable housing inventory and address violations through better communication. The lack of communication resulted in some affordable housing owners overpaying thousands of dollars in property taxes.
Because Economic Development did not submit a complete list of affordable homes to the Assessor’s Office, the assessor did not recognize about 51 homes as affordable. The owners of those homes were charged market-rate property tax, and the city will have to process refunds of about $40,000.
Economic Development also does not regularly communicate with Excise and Licenses to share lists of affordable homes. Economic Development can contact Excise and Licenses when researching a possible violation, but Excise and Licenses is unaware of affordability restrictions. This lack of communication could result in unidentified violations.
Finally, the agency is not following best practices used by other cities’ affordable housing programs to preserve affordability of homes through the foreclosure process. As a result, some homes have been foreclosed upon and lost from the affordable housing inventory when their affordability might have been preserved and made available to a future buyer in need of affordable housing.
As of March 2019, Economic Development reported 1,619 locally funded for-sale homes in the affordable housing program. However, the agency reported it lost 236 of those units from the inventory due to foreclosure and expiring covenants, leaving the total of active affordable homes at 1,383.
“While not all foreclosures can be prevented, it is important for the city to have a strategy to preserve the affordability of the home whenever possible, before the home changes hands in the foreclosure process,” Auditor O’Brien said.
Economic Development chose to disagree with six of our 12 recommendations. The agency says annual monitoring of occupancy through letters does not ensure accurate information and is a burden for staff. However, Economic Development already requires some potential violators to sign an affidavit to confirm occupancy. Economic Development also disagreed with recommendations related to preserving affordability during the foreclosure process.
“I am disappointed Economic Development has chosen not to take seriously all of our recommendations to rectify the issues identified in our report,” Auditor O’Brien said. “Our recommendations could help city leaders move forward with a much more efficient and effective new approach to affordable housing.”